New hedge funds need $300 mln just to break even: Survey

Monday, 9 Dec 2013 | 11:44 AM ETReuters

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Traders launching a hedge fundneed to raise at least $300 million in assets to pay for rising regulatory costs and to offset lower fees, a survey showed, a far cry from the pre-crisis days when managers could start with tens of millions.

According to the survey by Citi, hedge funds now charge annual management fees of as low as 1.58 percent of assets, down from the traditional 2 percent that larger funds still command.

Added to this, compliance and regulatory costs have risen because of new rules such as the Alternative Investment Fund Managers Directive in Europe and Dodd-Frank legislation in the United States.

"Fee compression continues to reshape the business of hedge funds, lowering fees even as expenses rise, all but eliminating fee-only operating margins, and raising the level of assets needed for a hedge fund business to succeed,'' said Alan Pace, Global Head of Prime Brokerage and Client Experience at Citi.

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The findings underline the diverging fortunes of hedge funds today. While larger firms have sucked in the bulk of new cash flooding into the industry from institutional investors, smaller funds have struggled to raise assets.

By contrast, until smaller funds break the $1 billion in assets mark, they will struggle to cover expenses from management fees alone, the survey showed, meaning managers must increase assets and produce a positive performance or subsidize a loss-making business.